Westfield has “no choice” in decision to negotiate lower rent on new leases, experts suggest

Amid tough retail trading conditions, Westfield Group has said its new tenancy contracts could be lowered by up to 10% in its retail malls, reports show.

The figure emerges as the group, along with Westfield Retail Trust, released its half-year financial 2013 financial reports to shareholders yesterday.

Leasing Information Services managing director Simon Fonteyn told SmartCompany this morning that Westfield’s negative leasing spreads were “falling into line” with trends from other major retail centres across Australia.

“In June 2012, The GTP Group took at 10% reduction on new leases, while in December 2011, Stockland reported a 6% reduction,” he says.

Fonteyn says there are “so many reasons” why its retail leases are under strain.

“The malaise in retail is well understood by industry…the drop is a sign of them having to meet the market,” he says.

He says overall renewal rates are down due to the tough retail conditions, so he thinks the move by Westfield is a sign that the retail giant is becoming “more pragmatic”.

“I think the market will be expecting something like that,” he says.

“Westfield has been resilient for so long… there has been a dichotomy with how they are performing and how the retailers are performing,” he says.

He says Westfield centres and other major Australian shopping centres are going through a major shift in their retail mix.

“Five years ago the mix was 25% fashion and footwear in the malls”, he says.

“Now there are more food outlets and services. There has been a remix in the fashion category, with the international brands such as Zara, Uniqlo, H&M and Topshop coming in.

“There are 30% fewer fashion retailers than five years ag0.”

Fonteyn says Westfield and other big malls are becoming like “de facto department stores” as these major international brands can take up to 15-20 single store fronts within a centre to make mega-stores.

Partner at Lowe Lippmann Chartered Accountants and Business Advisors, Brian Gordon, told SmartCompany he was surprised that Westfield would negotiate rents to that degree, but figured that the retail giant had “no choice”.

Gordon says retailers have shifted from the view that it is a risk to not be in a major mall, to a focus on the reality of whether the rent cost per square metre of retail space is bringing them the return they need.

He says Westfield is “stuck in the middle in a tough place”, balancing the return its retailers gain per square metre, with issues of tenancy vacancy rates and the need to answer to the banks.

“It is extremely well known that Australian shopping centre rentals are massively higher than everywhere else internationally,” he says.

Gordon says this leads to the vicious circle of vacancies, high profit margins and expensive goods for consumers.